Sunday, October 14th, 2018

 

‘Innocent bystanders’ – emerging economies struggle to contain capital outflows

NUSA DUA (Indonesia): After suffering months of capital outflows, policy makers from emerging markets attending IMF-World Bank meetings in Indonesia had a message for leading economies: current monetary and trade policies risk undermining us all.

The International Monetary Fund-World Bank meetings wrapping up today gave central bankers and finance ministers from around the world a chance to meet face-to-face in Indonesia, whose rupiah currency hit a new 20-year low in the past week.

Poorer and populous emerging markets have been particularly vulnerable to the escalating US-Sino tariff war and rate rises by the US central bank. Investors dumped assets seen as riskier, sparking painful currency plunges that have punished countries from India to recession-hit South Africa, as well as triggering crises in Turkey and Argentina.

“We are all aware that the normalisation of the monetary policy in the US, combined with their fiscal policy and trade policy … are all creating a systemic impact to the whole economy in the world,” Indonesian Finance Minister Sri Mulyani Indrawati said in an interview during the meetings in Bali.

The Federal Reserve's nearly three-year-old tightening cycle has in part prompted a global shift in capital away from emerging markets and after three increases this year, it foresees another December rise, three more next year, and one in 2020.

A senior Fed official in Bali said the rate rises were right for domestic policy and ensuring they were gradual and predictable was “the best solution” for minimising unintended volatility in emerging markets.

In a bid to support the rupiah, Bank Indonesia has raised rates five times since mid-May and intervened regularly, but still the currency has lost nearly 11% this year, leaving it at the weakest levels since the 1998 Asian financial crisis.

Bank Indonesia governor Perry Warjiyo said that the 150-basis point rate increases since mid-May aimed to keep Indonesian assets attractive enough for foreigners to stay invested, but calibrating this in the current environment was hard.

“The risk premia are very difficult to incorporate because risk premia are responding to geopolitical, responding to trade tension,” Warjiyo told a panel in Bali.

Finance ministers for developing nations in the Group of 24 (G24) economies urged major economies to reform the global trading system, rather than discard it.

The G24 statement, issued on the sidelines of the Bali meetings, said all emerging markets were “adversely affected” by excessive capital flow volatility.

While many countries shared common fears, Indrawati said it was difficult to forge cooperation to counter the risks.

“It's not really clear how the world is going to coordinate more effectively, especially when each country has their own domestic issues,” she said.

The Philippine peso has shed nearly 8% this year and its deputy central bank governor, Diwa Guinigundo, said the IMF and other global institutions should advise advanced economies on the potential negative consequences of their moves.

“It's the spillovers that we are concerned with … the spillover could have effects from one market to the other, from the financial market to the real market,” said Guinigundo.

He said while it was good for policymakers to be ahead of the curve in tightening, they should take account of the growing clout of emerging markets. “It should also be emphasised that Asean+3 (China, Japan, Korea), we account for a good bulk of the world's population and GDP.” – Reuters


Dispelling the myths about retirement, saving and investing

KUALA LUMPUR: The “myth” that it is “okay” to rely on Employees Provident Fund (EPF) savings and that it is too early to start investing must be dispelled, especially among the youth, according to Securities Commission Malaysia chairman Tan Sri Ranjit Ajit Singh.

In his speech at the InvestSmart Fest (ISF) 2018 last Friday, Ranjit said more than 68% of EPF members aged 54 had less than RM50,000 in their EPF savings and 70% of members who withdraw their funds at the age of 55 use up their savings less than a decade after retiring.

“This is indeed alarming. If we don't further the message for Malaysians, especially the youth, to start saving and investing from young, Malaysians will not be able to sustain life post retirement, especially taking into consideration of inflation, costs of living and our growing life expectancy,” he added.

However, Ranjit said, efforts to dispel the myth seem to be rather challenging given the fact that young Malaysians are still not investing enough.

He said based on data provided by Bursa Malaysia, while the number of young investors increased in 2017, active accounts of those 18 to 25 years old and 26 to 35 years old account for only 22.5% of the bourse's total retail participation last year.

Therefore, with the theme of “Investing for a Sustainable Future”, Ranjit said, ISF 2018 aims to send the message to the youth that they should start planning for the future, take charge of their financial well-being and invest from an early age.

Key figures are lined up to speak on various areas, including financial planning, share investment, scam awareness, retirement planning, and cryptocurrencies as well as initial coin offerings.

Ranjit said the three-day event brings together 46 exhibitors comprising capital market intermediaries, associations and relevant government agencies to share insights on Malaysian capital markets. He expects the event to draw 20,000 visitors.

Since its launch in 2014, the InvestSmart initiative has reached more than 23 million members of the public through various mediums of investor engagements.

Meanwhile, Youth and Sports Minister Syed Saddiq Syed Abdul Rahman, who officiated at the event, said he hopes the government will enhance the Technical and Vocational Education and Training capacities under Budget 2019 to empower the initiative.

Syed Saddiq said this is important in order to reduce the youth unemployment rate to a single-digit level, noting that it stood at 13.1% in 2016 and 10.7% last year.

“If we look at other countries, they are able to do so and we must do better in terms of creating more quality jobs for the young people,” he added.


At IMF meetings, China’s globalisation agenda left behind in trade debate

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Saudi Arabia says it will respond to any economic sanctions, says state news agency

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Experts have mixed views on introduction of new taxes

KUALA LUMPUR: As the announcement of the 2019 Budget looms near, experts have mixed views over the government’s plan to introduce new taxes due to various concerns.

The probability of introducing the inheritance tax, digital tax, capital gains tax and soda tax, as well as increasing the sin tax, has been thoroughly weighed by experts in the field as per challenges and effects of the tax implementation on the consumers.

Inheritance tax

YYC Tax Consultant Yap Shin Siang said the implementation of inheritance tax had its limitations as it contradicted the Real Property Gains Tax (RPGT) Act 1976.

“RPGT is chargeable on gains arising from the disposal or sale of real properties or shares in real estate property companies. Besides contradicting the RPGT Act, it will also create double taxation,” she said.

There are few conditions that are not liable to RPGT:

(i) The disposal of property made after five years from the date of acquisition of the property other than company, and other than non-citizen and non-permanent resident individual is not liable to RPGT.

(ii) Transfer of asset by the way of gift by a donor who is citizen, where the donor and the acquirer are; husband and wife, parent and child and grandparent and grandchild.

(iii) Gain on disposal of one private residence only for a Malaysian citizen or permanent resident.

“In a situation where a father passed away and the property is being passed on to his son, there will be no RPGT on the property but there will be an inheritance tax.

“As a result, it contradicts with RPGT because RPGT doesn't charge tax on the property again when the owner of the property has passed away and pass it to the son,” she said.

She added that the implementation of inheritance tax may trigger individuals to sell off all the properties and migrate overseas, create a tax inflation and increase the burden of the acquirer to bear on the property been transferred to him/her.

“This will end up in the property being sold by force as the acquirer cannot afford to pay for the inheritance tax charge,” Yap added.

Based on the Act, the RPGT is subject to chargeable gains derived from the disposal of property.

Digital Tax

With the tremendous growth in digital economy over the past years, there have been suggestions on the need to implement digital tax to increase the revenue collected by the government.

However, the concern is that online platforms do not own any items and thus, the high probability of double or maybe triple taxation.

Citing an example, Yap said the Inland Revenue Board viewed the digital marketing payment to non-resident company as royalty income and hence subject to withholding Tax (WHT).

WHT is a tax that a payer has to pay when certain types of payments (interest, royalty, services) are made to non-resident companies.

“What can be done is to promote the digital marketing sector better and provide double deduction on using digital marketing service. The government should also review the definition of digital marketing payment and remove it from the definition of royalty,” she said.

Soda Tax

As for soda tax, Kamlesh Mahtani, Head of Sales, Start-Up and Small Business of accounting firm Sage said the implementation of the tax would initially impact the beverage industry but will naturally follow through.

“Businesses that sell these drinks may fear lower revenue from sales of these items as the price would be raised. It is however an opportunity for drink manufacturers to be encouraged to reduce the amount of sugar in their drinks to a certain level to be exempted from the tax,” he said.

However, Mahtani stressed that the tax mechanism must be implemented properly, with the taxation and regulations rightly put in place.

“Should the tax becomes a reality and implemented here in Malaysia, businesses need to adapt to the changes into their accounting software, making the transition easy for businesses affected,” he said.

Globally, over 26 countries, from Portugal to Saudi Arabia, have introduced a variation of this soda tax which they term the “sugar tax” in their respective countries or cities.

The sugar tax is basically a tax on sugary drinks, to increase the price of these drinks, to influence consumer behaviour as well as encourage companies to reformulate and cut sugar.

Capital Gains Tax

Meanwhile, Fund Manager Danny Wong Teck Meng said that the implementation of the tax on stocks and bonds now will lower the returns on investment.

At this time, with global market volatility, it might create uncertainty among investors.

“In taxes, the most important is the rate. If this takes place, investors will compare on what they can get if they invest here in Malaysia or when they invest in other countries,” he said.

A capital gains tax is a tax on the profit realised on the sale of a non-inventory asset that is greater than the amount realised on the sale.

The most common capital gains are realised from the sale of stocks, bonds, precious metals, and properties.

Increasing Sin Tax

Wong said increasing sin tax was acceptable such as on cigarettes, alcohol and gaming as it is not a broad-based tax.

“These items are placed under the sin tax due to its negative effect on users especially health, hence increasing it will only affect a small portion of the society, not the majority,” he said.

Under the Sales and Services Tax, alcohol is being taxed at 10 per cent compared to only six per cent during the Goods and Services Tax (GST) regime.

However, he said the government should also strengthen the enforcement to ensure that contrabands were hard to obtain in the market to avoid tax leakages.

Carlsberg has reportedly said that contraband beer consumption made up 22 to 25 per cent of the market, with the bulk of it occurring in Sabah and Sarawak and impacting government tax revenue.

As for smuggled cigarettes, it was reported that the revenue loss by the government was estimated at RM4 billion.

Overall

To sum it all, Wong said broadening the taxes base affecting consumers as a whole right now would not be a positive move as it will be the main cause of price inflation.

“It is true that there are many other factors that affect prices and tax is only a component of it,” he said.

However, he stressed that if the implementation of a new tax is not being done properly and various taxes are implemented one after another, it will create multiple layers of taxes which is bad for the end user.

“With the GST, we know what we are being taxed for and it is a standard rate of six per cent for everything, or it is zero-rated.

But if all these new taxes come in now like the soda tax or digital tax, it will create multiple layers of taxation,” he said. – Bernama


Seeds of next global financial crisis being sown, top officials warn

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Saudi stocks plunge 7pc on Khashoggi fallout; biggest drop since 2014

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Malaysia’s economic fundamentals still intact : analysts

KUALA LUMPUR: Malaysia’s economic fundamentals remain intact, regardless of the gloomy scenario and tough challenges faced by its capital market due to recent heavy outflow of foreign funds arising from negative developments locally and overseas, analysts said.

MIDF Amanah Investment Bank Analyst Adam Mohamed Rahim said the favourable outlook was evidently shown by the business tendency index on services sector which indicated strong sentiment, in addition to the commendable distributive trade.

“Following the spike on oil prices, investment in oil and gas is expected to gain traction. Hence, we do not discount the possibility that this will attract foreign interest into Malaysia,” he said.

He said investors reacted negatively to the termination of the MMC-Gamuda joint-venture’s underground work contract for Mass Rapid Transit 2 (MRT2) by the government, and this was aggravated by Wall Street’s biggest loss in eight months as technology companies remained a drag and worries about rising interest rates.

“As of Thursday, the local bourse has declined much more than its ASEAN peers, losing by more than three per cent so far this week, probably exacerbated by the MRT2 issue,” he told Bernama.

He said as foreign funds largely depend on the prevailing sentiment in a trading period, sentiment for the upcoming week would largely centre on the review of the 11th Malaysia Plan (11MP) that might cast some indication on the path of various sectors of the Malaysian economy.

Bank Islam Malaysia Bhd Chief Economist Dr Mohd Afzanizam Abdul Rashid said announcement on the 11MP mid-term review on October 18 would provide clarity on policy direction, thereby providing support to local equities.

He said foreign funds had been net sellers from Monday to Thursday last week with foreign selling amounting to RM2.83 billion, retail selling amounted RM2.31 billion and institutional sell-offs were at RM4.85 billion.

“This was primarily driven by the external factors. Slowing China economy has led People’s Bank of China to reduce the reserve requirement ratio by 100 basis points last weekend,” said Mohd Afzanizam.
On the domestic front, there were mixed reactions among investors as the government had indicated that it might introduce new taxes in the upcoming budget announcement in November.

Meanwhile, MIDF Amanah Investment Bank Bhd Chief Economist Dr Kamaruddin Mohd Nor said the 11MP review was also expected to provide a fillip for the ringgit which has been weighed by external factors.

“Positive news in the form of clear direction and project announcement will excite the market,” he said.

He said the ringgit’s performance in the recent week broadly followed the movement of other regional currencies which were under pressure from the strengthening dollar in the past months.

Kamaruddin said the US dollar index gained 3.12% to-date against a basket of other major currencies, driven by the normalisation in US interest rate amid good economic numbers, while the ongoing trade spat worked against emerging market currencies.

“Investors are on risk-off mode as the level of uncertainties heightened,” he said.

Therefore, he said excluding the unknown impact from the 11MP review, the ringgit was expected to remain under pressure with sideways trajectory with a trading range of between 4.13 and 4.16 vis-à-vis the US dollar next week.

Meanwhile, Mohd Afzanizam said the sell-off in equities was a region-wide phenomenon and following the uncertainty, equity markets would remain edgy next week.

“At the moment, the FTSE Bursa malaysia KLCI (FBM KLCI) is seen to be in oversold position, therefore it really explained Friday’s rebound which saw a gain of 22.25 points or 1.3% to settle at 1,730.74 points.

“We believe values have emerged…the FBM KLCI price-to-earnings ratio currently stands at 16.4 times bases on forward earnings which is below than the +1 standard deviation of 17.1 times,” said Mohd Afzanizam.

However, risk-off trade will continue to dominate market sentiments, therefore, equities are expected to remain choppy in the short term.

Technically, the FBM KLCI might linger around its current support and resistance level of 1,700 and 1,745 points respectively next week.

Dr. Ahmed Razman Abdul Latiff, Putra Business School’s Senior Lecturer and Manager of Business Development, said even though the local market had seen more than RM61.03 billion market capitalisation wiped out between Wednesday and Thursday, the situation would not be long lasting.

“This is because what had happened in the US was caused by a mixture of internal and external issues that would not necessarily translate into worldwide phenomenon,” he said.

Among the internal reasons why stocks had tumbled in the US was because of the ever increasing interest rates imposed by the Federal Reserve, fading technology shares and too high expectation by the investors, he added.

These reasons certainly outweigh the sentiments towards the trade war between the US and China as well as impending sanctions of Iran by the US.

Externally, Adam said the issues of trade war had also taken a back seat in investors’ minds as they were glued to the surge in US treasury yields, but any update on the trade dispute would definitely affect the local market.

Mohd Afzanizam added the ongoing trade war between the US and China had taken another dimension with the recent reports on a hack in computer chips.

On other resounding developments, Mohd Afzanizam said the International Monetary Fund had also revised down its global growth forecast by 0.2% points for 2018 and 2019.

However, he said the US interest rates were likely to go higher in December and next year in view of strong labour markets and increasing inflationary pressures owing to rising wage growth. — Bernama


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